Category Archives: Prediction Markets

One person’s take on the CFTC’s action against Intrade

An important headline in the Wall Street Journal (WSJ) earlier this week was “Intrade Won’t Take U.S. Bets”. Quoting from this WSJ article, “Intrade said it would no longer accept bets made by U.S. residents, a move that came just hours after U.S. regulators filed a civil complaint against the company over its commodities-focused markets.”

I have asked Lou Kokernak, who is a principal with Haven Financial Advisors and an expert on prediction markets like Intrade, to offer his perspectives on the CFTC’s action this week against Intrade:

One person’s take on the CFTC’s action against Intrade

By Louis Kokernak

November 30, 2012

This week, the CFTC announced a civil suit against two overseas prediction markets, Intrade and TEN. I am an occasional user of the former – Intrade. I take small positions in their political futures markets every presidential election cycle. It’s fun and educational, at least for me. Founded in 1999 by the late John Delaney, the Dublin-based futures market has had a remarkable record in successfully predicting election winners and other notable events. Some academic analysis indicates that Intrade’s prediction markets do a better job at naming election winners than polls.

The simplified version of the CFTC’s claim is that Intrade illegally offered “commodity options” to American investors and had done so for years. The agency claims that any such options must trade on a CFTC-registered exchange or must be traded by qualified (high net worth) investors. I can vouch that Intrade did not vet its participants to determine if they passed muster as qualified investors. However, I doubt that the these overseas prediction markets really represent any meaningful offshore commerce.

Intrade’s prediction markets have an excellent track record in assigning reasonable probabilites to various key events. They do so with relatively little money at risk from the public. It’s a testament to collective wisdom of crowds. There is a prediction market on the likelihood that the US enters a recession in 2013. The open interest represents a grand total of $31,000. Another market pays off ten dollars if a country exits the Euro within a year. That contract has an open interest of $29,000. Needless to say, these figures are dwarfed by the open interest on any contract on the New York Mercantile Exchange (NYMEX) or the Intercontinental exchange (ICE). The open interest on Brent crude oil contracts at ICE is about $100 billion. It’s interesting to note that ICE announced earlier this year that they were reorganized their over the counter products to a new format to avoid compliance costs under the new Dodd-Frank rules. Most of their oil contracts actually trade in Europe. It’s great that the ICE has the resources to avoid American regulatory creep. Perhaps little Intrade was not so fortunate.

The text of the CFTC complaint identifies Intrade’s prediction markets in oil, gold, GDP, and unemployment as falling afoul of securities law. Intrade oil, gold, and economic markets are binary propositions. They either pay off $10 in full or not at all. As such, they are completely unsuitable for hedging by institutional investors. Economics 101 suggests that oil producers can naturally hedge the value of their commodity by entering into futures or options markets. The options that trade on US amd European markets are standard put and call options which offer a continuous payout based on the difference between the strike price and prevailing market price at expiry. The holder of an Intrade contract either makes $10 or nothing at all. In effect, these prediction markets resemble the kind of bets that you would make at the office water cooler. They may be useful in terms of determining market sentiment but would have no use to institutional players that intend to sell or take delivery of a commodity. In other words, binary options won’t gain institutional traction in their current form. There is no simple way for a producer to set a floor or ceiling for a commodity price.

The CFTC has nothing to fear that Intrade that is going to siphon trading volume away from the United States. ICE might be able to do so with its modern electronic format and global reach. Maybe they were too big a target. Intrade is a small fry that provided the media and individuals with useful information at little cost. Within hours of the CFTC suit, they stopped taking orders from American customers for all their contracts, not just the “commodity” contracts in the CFTC complaint. That’s a shame because Americans comprised a large fraction of the trading volume to the company. It remains to be seen whether they will survive this regulatory broadside.

Binary options work great for current events like elections or the Oscar nominations. They just fail when applied to continuously priced commodities. The upshot here is that Intrade’s markets are fundamentally different from those offered on real commodity exchanges. In their current form, they cannot attract the large sums of money that would make them worth the attention of the CFTC.

Maybe the CFTC should just lay off this minnow and police real commodities markets.

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Intrade Won’t Take U.S. Bets

Intrade Won’t Take U.S. Bets

wsj.com

“Intrade said it would no longer accept bets made by U.S. residents, a move that came just hours after U.S. regulators filed a civil complaint against the company over its commodities-focused markets.” It will be interesting to see the impact that this will have upon the level of interest in and reliability of prediction markets for US-centric events, which make up the lion’s share of Intrade contract offerings.

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Intrade Predicted 11 out 12 Oscars in 2010-11

Hat tip to Mark Perry, who points out that in 11 of 12 cases, the Intrade contracts correctly predicted this year’s Oscar winners.  Apparently the only “miss” within this group was the Best Director prize, which went to “The King’s Speech’s” Tom Hooper instead of “The Social Network’s” David Fincher.

CARPE DIEM: Intrade Predicted 11 out 12 Oscars in 2010-11.

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Prediction Markets and the Upcoming Midterm Elections

Now that we are on the eve of the midterm election, it is worthwhile considering what the “prediction markets” are indicating. 

In an earlier posting entitled “What are the prediction markets saying about the economy?”, I lay out some of the technical details concerning how the intrade.com market in particular works (there are other similar markets; e.g., the Iowa Electronic Market at the University of Iowa’s Tippie School of Business, but my sense is that intrade.com is the dominant player in this “space”).  The intrade.com contracts are very simple – each contract specifies some sort of state-contingent event, along with a date at which the contract matures.  The payoff is $10 if the contingent event occurs, and $0 otherwise.  Prices are quoted in terms of Intrade “points”, and each $1 payoff is worth 10 Intrade points, so a $10 payoff is worth 100 Intrade points. This way, the market prices resemble probabilities (technically, these are actually “Arrow-Debreu” prices), but for practical purposes, it is reasonable to interpret these prices as probabilities.

Here, I reproduce the Wednesday, 10/28 implied probabilities associated with various political contracts. The GOP House Control contract currently indicates nearly a 90% probability that the GOP will win control of the House of Represenatives. In my opinion, the more interesting contracts are the ones indicating the number of House seats gained by the GOP and Senate Seats held by the GOP.  The current make-up of the U.S. House of Representatives is 256 Democrats, 178 Republicans and one vacancy (256+178+1=435), so if the GOP gains 50 seats (80% probability), it will have a majority of 22 House members.  In the Senate, the markets indicate a nearly 80% probability of 48 GOP seats.  However, given that there are at least two “independents”, this would seem to indicate “gridlock” at the very least!

Control of the House of Representatives

Control of the Senate

Democrats

11.1%

Chart

Trade

Democrats

55.0%

Chart

Trade

Republicans

88.8%

Chart

Trade

Republicans

12.5%

Chart

Trade

Neither

0.1%

Chart

Trade

Neither

32.5%

Chart

Trade

Number of House seats gained by the GOP

Senate Race Spotlight: CONNECTICUT

20 Seats Gained

97.7%

Chart

Trade

R. Blumenthal (D)

93.5%

Chart

Trade

 

30 Seats Gained

96.0%

Chart

Trade

Linda McMahon (R)

6.5%

Chart

Trade

 

40 Seats Gained

87.2%

Chart

Trade

Senate Race Spotlight: WEST VIRGINIA

 

50 Seats Gained

79.9%

Chart

Trade

Joe Manchin (D)

52.8%

Chart

Trade

 

60 Seats Gained

43.9%

Chart

Trade

John Raese (R)

47.2%

Chart

Trade

 

Number of Senate seats held by GOP

 

45 GOP Seats

97.5%

Chart

Trade

 

46 GOP Seats

96.9%

Chart

Trade

 

47 GOP Seats

89.0%

Chart

Trade

 

48 GOP Seats

78.9%

Chart

Trade

 

 

49 GOP Seats

48.5%

Chart

Trade

 

50 GOP Seats

30.0%

Chart

Trade

 

 

51 GOP Seats

15.0%

Chart

Trade

 

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Intrade.com US Midterm Elections Market Update (Friday, October 22, 2010)

Control of the House of Representatives

Probability

Democrats

10.30%

Republicans

88.90%

Neither

1.00%

   

Number of House seats gained by the GOP

 

20 Seats Gained

97.70%

30 Seats Gained

96.00%

40 Seats Gained

93.90%

50 Seats Gained

73.00%

60 Seats Gained

37.00%

   

Control of the Senate

 

Democrats

58.70%

Republicans

16.10%

Neither

28.80%

   

Number of Senate seats held by GOP

 

45 GOP Seats

95.00%

46 GOP Seats

88.10%

47 GOP Seats

84.00%

48 GOP Seats

70.20%

49 GOP Seats

48.00%

50 GOP Seats

30.30%

51 GOP Seats

20.40%

   

Senate Race Spotlight: COLORADO

 

Michael Bennet (D)

37.60%

Ken Buck (R)

60.00%

   

Senate Race Spotlight: CALIFORNIA

 

Barbara Boxer (D)

70.10%

Carly Fiorina (R)

29.50%

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Prediction Markets Update on 2010 US Congressional Control

I have blogged extensively over the years concerning how reliable the so-called “prediction markets”; e.g., intrade.com, Iowa Electronic Markets (IEM) are in assessing political outcomes,  particularly when compared with traditional surveys conducted by various media companies.  Examples include prediction market assessments of presidential elections (e.g., see Prediction markets assessment of the Presidential Election from October 26, 2004 and Preliminary assessment of the accuracy of the Intrade State-by-State contracts from November 5, 2008), Supreme Court confirmations (e.g., see SC.CONFIRM.ALITO from November 6, 2005), as well as other kinds of contingent events such as the state of the economy (e.g., see What are the prediction markets saying about the economy? from April 10, 2009), etc. 

Both intrade.com and IEM maintain actively traded markets pertaining to the question of which party will control Congress (both House and Senate) after the 2010 midterm election which will be held on Tuesday, November 2, 2010.  The intrade.com market offers futures contracts which pay 100 points (where 1 point = $.10) in the event that a specific contingent event occurs and 0 points otherwise. Thus, prices represent “risk neutral” event probabilities.

As of the market close on August 2, 2010, the Intrade market put the odds that the GOP will control the US House of Representatives after the midterm election at 59.9%.  The ticker symbol for the contract upon which this probability is based is HOUSE.REP.2010.  This contract began trading on September 5, 2008; the lowest recorded price was 15 (around the time of President Obama’s inauguration in January 2009), and the highest recorded price was yesterday’s closing price of 59.9.  Here’s a picture of the time series price behavior of HOUSE.REP.2010 contract since inception:

Like the HOUSE.REP.2010 contract, HOUSE.DEM.2010 contract began trading on September 5, 2008; not surprisingly, the lowest closing price occurred yesterday (43), and the highest price recorded was 90 (around the time of President Obama’s inauguration in January 2009). Here’s a picture of the time series price behavior of the HOUSE.DEM.2010 contract since inception:

Not surprisingly, the HOUSE.REP.2010 and HOUSE.DEM.2010 price series correlate very strongly with % Disapprove / % Approve numbers from the Gallup Daily Tracking Poll on Obama Job Approval (source: http://bit.ly/lS4ZF):

Obama_job_approval

There are also SENATE.REP.2010 and SENATE.DEM.2010 contracts which assess the odds of Republican versus Democratic control of the Senate after the midterm election; given the fact that only 1/3 of the Senate turns over ever two years, it is not surprising, given the size of the current Democratic majority in the senate, that the SENATE.REP.2010 last traded today at only 17 and the SENATE.DEM.2010 traded at 73.  However, it is interesting that the SENATE.NEITHER.2010 contract (which pays off 100 intrade points if neither party has a majority in the Senate after the midterm election) last traded at 11.6.  There are also Senate contracts that assess the odds of how many seats the GOP will have in the wake of the midterm election; the market’s current assessment is that the odds that the GOP will have 47 or more seats is 62%.  The takeaway from these data points is that while the Democrats will hold the Senate, their majority will be substantially weakened.

For more information concerning the topic of “prediction markets”, I recommend an article entitled “Prediction Markets“ by Justin Wolfers and Eric Zitzewitz that appeared a few years ago in Journal of Economic Perspectives (Vol. 18, No. 2 (Spring 2004), pp. 107-126).

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Prediction Markets’ take on American politics, public policy, and the economy in 2010

Intrade.com publishes the “Intrade Gazette” every two weeks.  The “Intrade Gazette” is essentially a newsletter that comments on the prediction markets’ take on any number of topics.  Anyway, I just received the 1/28/2010 “issue” via email today, which I reproduce below.  The previous (1/14/2010) issue is available on the web at http://www.intrade.com/Market_Moves/20100114/newsletter.html.

===================================

“After having just delivered his first State of the Union speech, it’s a good time to look at what the Intrade markets are predicting for President Barack Obama in 2010.

Much has been made of the President’s falling approval ratings, which according to Real Clear Politics currently stand at 48.7% – a similar rating to both Jimmy Carter and Ronald Reagan after their first year in office. The Intrade markets suggest this rating will likely hold steady for the immediate future. There is 73.5% probability the President’s approval rating will remain above 45% at the end of March, and a 43.6% chance it will climb to above 50%. The figures for the end of June paint a similar picture: a 75.0% chance of an approval rating above 45% and a 40.0% chance it will be above 50%.

The continuing lack of cooperation from Republicans and the loss of that key 60th Senate vote will make it tough for the President to advance his domestic agenda in 2010. The market gives his heath care reforms only a 34.0% chance of being passed before the end of June. Another of his signature policies, a cap-and-trade system to regulate carbon emission, currently only has a 19.9% probability of being established. Early trading also suggests the President will be unable to close Guantanamo Bay detention camp before the end of the year.

What about the economy? The market shows it should continue to grow, with a 90.1% probability of positive growth in Q1 of 2010 and a 86.0% probability of positive growth in Q2. The chance of the economy slipping back into recession during 2010 are only 18.7%. But according to the market, unemployment will continue to be a problem. There is a 65.1% probability the unemployment rate will remain above 9.5% at the end of the year, and a 44.9% probability it will climb above 10.0% at year-end. The stock market is not expected to see significant growth. The Dow Jones Industrial Average has 56.0% chance of staying above 10,000 and a 49.1% chance of being above 10,500 at the end of 2010.

2010 is shaping up as a tough one for President Obama. And to top things off the Democrats will most likely be operating with reduced Congressional majorities after November’s mid-term elections. The bright side? The market shows a 58.4% chance he will be re-elected in 2012.”

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Prediction Markets’ take on the 2010 United States Senate special election in Massachusetts

Intrade.com maintains an actively traded market for futures contracts which pay 100 points (where 1 point = $.10) in the event that a specific contingent event occurs and 0 points otherwise. Thus, prices represent “risk neutral” event probabilities. I have previously blogged about how useful prediction markets can be in assessing political events such as election outcomes (e.g., see Prediction markets assessment of the (2004) Presidential Election and Preliminary assessment of the accuracy of the Intrade State-by-State contracts (for the 2008 Presidential Election)); furthermore, an article entitled “Prediction Markets“ by Justin Wolfers and Eric Zitzewitz, Journal of Economic Perspectives (Vol. 18, No. 2 (Spring 2004), pp. 107-126) provides a particularly informative technical survey concerning prediction markets in general.

Lately, the upcoming (January 19) United States Senate special election in Massachusetts has become particularly interesting because up until the past couple of weeks, the Democratic candidate (Martha Coakley) was heavily favored to defeat the Republican candidate (Scott Brown).  Below, I list the time series graphs for the MA.SPEC.SENATE.DEM and the MA.SPEC.SENATE.REP contracts that are currently trading on intrade.com.  The MA.SPEC.SENATE.DEM contract is a (100,0) bet on Martha Coakley winning this special election, whereas the MA.SPEC.SENATE.REP contract is a (100,0) bet on Scott Brown prevailing.  Both contracts were initially offered on this exchange in September 2009, but only since the beginning of 2010 has there been much interest in trading these contracts.  


MA.SPEC.SENATE.DEM

 
MA.SPEC.SENATE.REP

Lately there has been strong momentum in Brown’s favor, and as I write this, the MA.SPEC.SENATE.REP contract is up 13 points from its previous (1/15) close of 41, whereas the MA.SPEC.SENATE.DEM contract is down 12.5 points from its previous close of 61 (note that that the contract prices can sum to slightly more or less than 100 because trades are non-synchronous).  The price change since earlier this week has been quite dramatic, going from a roughly 80/20 advantage for Coakley to the present situation which indicates a slight advantage probabilistically for Brown.  Anyway, it will be obviously very interesting to see how this election plays out!

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What are the odds that the Public Health Option will be passed into law by the end of this year?

Intrade.com maintains an actively traded market for futures contracts which pay 100 points (where 1 point = $.10) in the event that a specific contingent event occurs and 0 points otherwise. Thus, prices represent “risk neutral” event probabilities. I have written previously about how useful prediction markets can be in assessing political events such as election outcomes (e.g., see Prediction markets assessment of the Presidential Election from October 26, 2004 and Preliminary assessment of the accuracy of the Intrade State-by-State contracts from November 5, 2008) and Supreme Court confirmations (e.g., see SC.CONFIRM.ALITO from November 6, 2005), as well as other kinds of contingent events such as the state of the economy (e.g., see What are the prediction markets saying about the economy? from April 10, 2009), etc.

Currently (as of August 19, 2009), the Intrade market gives the Public Health Option a 36% chance of being passed into law by the end of this year (the closing price yesterday, on August 18, was 32 Intrade points).  The contract is called US.GOVT.HEALTHPLAN.DEC09, and it has been trading ever since June 12, 2009. The highest price recorded for this contract was 51.5 Intrade points (at the contract’s inception on June 12, 2009), and the lowest price recorded was 14.1 Intrade points (on August 17, 2009, after it appeared that the Obama administration might be willing to compromise on the public option in favor of non-profit health cooperatives).  Here’s the complete time series since contract inception on June 12:

For more information concerning the topic of “prediction markets”, I recommend an article entitled “Prediction Markets“ by Justin Wolfers and Eric Zitzewitz that appeared a few years ago in Journal of Economic Perspectives (Vol. 18, No. 2 (Spring 2004), pp. 107-126).

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